brookline bank

8/14/2019 brookline bank

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Brookline Bancorp, Inc. AR2001


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S E L E C T E D C O N S O L I D A T E D

F I N A N C I A L D A T A O F T H E C O M P A N Y

The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunc-

tion with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report. Prior to

March 24, 1998, the Company had no significant assets, liabilities or operations, and accordingly, the data prior to such time represents

the financial condition and results of operations of the Bank.

At December 31, 2001 2000 1999 1998 1997

(In thousands)

Selected Financial Condition Data:

Total assets $1,099,596 $ 1,036,150 $ 907,334 $ 879,027 $ 701,119

Loans, excluding money market loan participations 828,360 716,559 635,556 548,558 472,412

Money market loan participations 6,000 28,250 15,400 44,300 24,000

Allowance for loan losses 15,301 14,315 13,874 13,094 12,463

Debt securities:

Available for sale 146,239 125,219 100,089 102,934 89,620

Held to maturity 9,558 50,447 103,434 121,390 65,444

Marketable equity securities 17,186 24,142 28,186 30,595 28,017

Deposits 620,920 608,621 512,136 489,370 482,304

Borrowed funds 178,130 133,400 108,800 94,350 69,265

Stockholders equity 285,445 282,585 274,800 278,222 132,757

Net unrealized gain on securities available for sale,

net of taxes, included in stockholders equity 6,720 6,244 7,759 14,416 13,739

Non-performing loans 140 - . - . 332 803

Non-performing assets 1,580 - . 707 2,272 3,176

Year Ended December 31, 2001 2000 1999 1998 1997

(In thousands)

Selected Operating Data:

Interest income $ 75,960 $ 71,560 $ 64,809 $ 61,419 $ 54,125

Interest expense 32,904 30,572 27,162 26,160 25,858

Net interest income 43,056 40,988 37,647 35,259 28,267

Provision for loan losses 974 427 450 300 - .

Net interest income after provision

for loan losses 42,082 40,561 37,197 34,959 28,267

Gains on sales of securities, net 3,540 8,253 7,437 2,843 74

Other real estate owned income, net - . 172 711 251 238

Gain from termination of pension plan 3,667 - . - . - . - .

Other non-interest income 2,091 1,469 966 1,111 853

Recognition and retention plan expense (167) (1,246) (3,593) - . - .

Internet bank start-up expense - . (746) (675) - . - . .

Restructuring charge (3,927) - . - . - . - .

Other non-interest expense (16,721) (14,831) (9,890) (9,181) (8,374)

Income before income taxes 30,565 33,632 32,153 29,983 21,058

Provision for income taxes 11,231 11,998 11,362 10,831 7,327

Net income $ 19,334 $ 21,634 $ 20,791 $ 19,152 $ 13,731


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2

T A B L E O F C O N T E N T S

0 N E

Selected Consolidated Financial Ratios and Other Data of the Company

T H R E E

Letter From the President

S I X

Management's Discussion and Analysis of Financial Condition and Results of Operations

T W E N T Y - T H R E E

Report of Independent Certified Public Accountants

T W E N T Y - F O U R

Consolidated Financial Statements

T H I R T Y

Notes to Consolidated Financial Statements

F I F T Y - E I G H T

Officers and Directors

F I F T Y - N I N E

Stockholder Information

On the cover: Designed in 1922 by F. Joseph Untersee of Brookline, the stained glass dome

in Brookline Savings Banks Main Office provides a focal point and natural light for the branch.


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L E T T E R F R O M T H E P R E S I D E N T

February 22, 2002

Total Assets (at December 31)

Total Loans (at December 31)

Stockholders Equi ty (at December 31)

excluding money market loan participations

Dear Shareholder:

Despite a significant slowdown in the economy last year, the

Company posted a modest increase in core after-tax earnings. Net income

of $19.3 million for 2001 benefited on an after-tax basis from $2.2 millionof securities gains and a $1.9 million gain from termination of the banks

defined benefit pension plan, but was penalized on an after-tax basis by

operating losses at Lighthouse Bank of $1.6 million and a restructuring

charge attendant to the closing of Lighthouse of $2.3 million. Adjusting for

these items, core net income for 2001 was $19.1 million versus core net

income of $18.9 million in 2000 when on an after-tax basis capital gains

were $5.2 million and Lighthouse losses $2.5 million.

Lighthouse Bank was clearly a significant drag on results over the

past two years, not only financially but in management time. Our goal of

enhancing our deposit generating capabilities by breaking free of brick andmortar constraints could not be achieved in a cost-effective, economical way.

As that became all too apparent early in the year, closure of Lighthouse

became a top priority. Efforts to sell the bank generated some serious

interest, but ultimately we concluded that Lighthouse had more value

merged into Brookline Savings.

While we entered the year concerned about the outlook for our lending

program, 2001 turned out to be an exceptional year. New loan originations

and re-finances totaled $282 million versus $192 million the prior year, and the

mortgage portfolio increased by over $100 million, or 15%, to $783 million.

With yellow caution flags flying, property appraisals and borrower financialstatements were subjected to very intensive scrutiny and construction loans

were roughly unchanged at $21 million, or less than 3% of the loan portfolio.

Non-performing loans of $140,000 at year end continued to be de minimis.

$ 879

$ 907

$ 1,036

$ 7011997

1998

1999

2000

2001

In Millions

$ 1,100

$ 549

$ 636

$ 717

$ 4721997

1998

1999

2000

2001

In Millions

$ 828

$ 278

$ 275

$283

$ 1331997

1998

1999

2000

2001

In Millions

$285

includes net unrealized gains on securities

available for sale, net of taxes


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Shareholder equity at year end was $285 million, or 26% of assets,

compared to $283 million, or 27% of assets at the end of the prior year. Stock

repurchases for the year totaled 735,450 shares at a cost of $10.8 million, or

$14.72 per share. Since the IPO in March of 1998, 2,921,378 shares, or 21%

of the minority shares sold have been repurchased at a cost of $33.8 million,

or $11.57 per share. As of December 31, 2001, an additional 894,915 shares

can be bought back under the existing repurchase program. It is our intent to

implement this program if favorable buying opportunities develop.A significant event in the banks history was the conversion of all

three corporate entities - the bank, the bank holding company and the mutual

holding company to federal charters on July 17th. As discussed at length

in last years proxy statement and in press releases, we believe that federal

charters provide important flexibility and benefits to mutual holding companies.

Upon receiving the federal charters, the board moved immediately to obtain

a dividend waiver from the mutual holding company and to increase the

annual dividend from $.28 to $.64 per share.

The outlook for this year is uncertain. Many economists are forecasting

that the economy is on the verge of recovery and a few believe a turnaround

is already underway, but their projections appear to be based more on evidence

that the downturn is reaching a bottom than that an actual pickup has begun.

With investor confidence undermined by the Enron failure and little potential

for increased consumer spending, a modest and uneven recovery may be the

best outcome that should be expected over the next 12 months.

In the Greater Boston area, there are worrisome vacancy levels in

some areas of commercial real estate. The high end of the owner-occupied

residential market has also softened. While to date area community banks

appear to have avoided any damage to their balance sheets, it may be overly

optimistic to expect this to continue. As in the past, we are taking comfort

in our careful, conservative loan underwriting process and strong financialposition. With the burden of Lighthouse lifted, this years earnings outlook

is promising despite the economic question marks.

Edward Rowley, who joined the Company's predecessor board in

1966, has decided not to stand for reelection at the annual meeting.

On behalf of the board, I thank him for his long, thoughtful and dedicated

service and wish him well.

In the following pages a detailed review of our operations is presented.

I look forward to a further discussion of the banks activities at the annual

meeting on April 18th.

Sincerely,

Richard P. Chapman. Jr.

President and Chief Executive Officer

Ef f ic iency Rat io

non-interest expenses (exclusive of recognition

and retention plan expense) divided by the sum

of net interest income and non-interest income

(exclusive of gains on sales of securities).

Income and expenses of Lighthouse are excluded.

Return on Average Stockholders Equit

excluding effect of unrealized gains on securities

available for sale, net of taxes

4.28 %

4.21 %

4.43 %

4.09 %1997

1998

1999

2000

2001 4.10%

Net Interes t Margin

Return On Average Assets

25.1 %

25.2 %

25.6 %

28.5 %1997

1998

1999

2000

2001 28.9 %

8.36 %

7.81 %

7.99 %

12.21 %1997

1998

1999

2000

20016.89 %

2.33 %

2.31 %

2.29 %

2.02 %1997

1998

1999

2000

2001 1.80 %


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M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S O F

F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S

6

Mutual Holding Company Structure and Stock Offering

Brookline Bancorp, Inc. (the Company) was organized in November 1997 for the purpose of acquiring all of the capital stock of

Brookline Savings Bank (Brookline) upon completion of Brooklines reorganization from a mutual savings bank into a mutual holding

company structure. As part of the reorganization, the Company offered for sale 47% of the shares of its common stock in an offering

fully subscribed for by eligible depositors of Brookline (the Offering). The remaining 53% of the Companys shares of common stock

were issued to Brookline Bancorp MHC (MHC), a mutual holding company. The reorganization and Offering were completed on

March 24, 1998. Net proceeds from the Offering amounted to $134.8 million. At December 31, 2001, the MHC owned 15,420,350

shares (57.6%) of the Companys shares of common stock outstanding.

Conversion to a Federal Charter

On February 21, 2001, the Board of Directors approved a plan to convert the Companys charter from a Massachusetts corporation

regulated by the Massachusetts Division of Banks and the Board of Governors of the Federal Reserve System to a federal corporation

regulated by the Office of Thrift Supervision (OTS). The charter conversion, which was approved by the stockholders of the Company

on April 19, 2001, was approved by the OTS on July 16, 2001. The MHC, Brookline and Lighthouse Bank (Lighthouse) also received

approval of their conversions from state to federal charters on that date.

Among other things, the charter conversions permit the MHC to waive the receipt of dividends paid by the Company without causing

dilution to the ownership interests of the Companys minority stockholders in the event of a conversion of the MHC to stock form. The

waiving of dividends will increase Company resources available for stock repurchases, payment of dividends to minority stockholders

and investments.

As part of the approval of the charter conversions, the OTS requires that the Company comply satisfactorily with several conditions, the

most notable of which is that Brookline and its subsidiaries must divest themselves of their investment in marketable equity securities

without material loss at the earliest possible date, but in any event no later than July 17, 2003. The divestiture can be accomplished by

sale of the equity securities or their transfer to the Company or its subsidiary. At December 31, 2001, Brookline and its subsidiaries

owned equity securities with a market value of $5.8 million.

As a federally-chartered institution, Brookline will be required to meet a qualified thrift lender test. Under that test, an institution is

required to either qualify as a domestic building and loan association under the Internal Revenue Code or maintain at least 65% of its

portfolio assets (total assets minus goodwill and other intangible assets, office property and specified liquid assets up to 20% of total

assets) in certain qualified thrift investments (primarily loans to purchase, refinance, construct, improve or repair domestic residential

housing, home equity loans, securities backed by or representing an interest in mortgages on domestic residential housing, and Federal

Home Loan Bank stock) in at least nine months out of each twelve month period. A savings institution that fails the qualified thrift

lender test is subject to certain operating restrictions and may be required to convert to a bank charter. The OTS has granted Brookline

an exception from the qualified thrift lender test through July 17, 2002. At December 31, 2001, Brookline maintained approximately

64.9% of its portfolio assets in qualified thrift investments.

Lighthouse

On April 12, 2000, the Company received regulatory approval for Lighthouse to commence operations as New Englands first-chartered

internet-only bank. The Company made a $25 million capital investment in Lighthouse at the beginning of May 2000. Lighthouse

commenced doing business with the public in the last week of June 2000.


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In April 2001, the Company announced the decision to either sell Lighthouse to a third party or merge it into Brookline. That decision

was reached after determining the amount of additional operating losses Lighthouse would likely incur before achieving satisfactory

profitability. On July 17, 2001, the existence of Lighthouse as a separate corporate entity was terminated by its merger into Brookline.

Brookline continues to provide on-line electronic banking services to the former customers of Lighthouse.

In contemplation of the merger, a pre-tax restructuring charge of $3.9 million was recorded in the second quarter of 2001 to provide for

merger-related expenses. Those expenses included personnel severance payments, termination of contracts with third party vendors,

occupancy rent obligations, write-off of equipment and software, and other miscellaneous items. Certain operating expenses associated

with servicing former Lighthouse customers continued through the third quarter of 2001. As of September 17, 2001, Lighthouse customers

accounts were transferred to Brooklines systems and records. See notes 18 and 19 of the notes to the consolidated financial statements

included in this annual report for information about the start-up expenses and operating results of Lighthouse.

General

The Companys activities consist primarily of investment activities and the holding of the stock of Brookline. The Companys business

operations, which are conducted primarily through Brookline, were also conducted through Lighthouse in 2000 and 2001. As a result,

references to the Company in the following discussion generally refer to the consolidated operations of the Company, Brookline and

Lighthouse.

The Companys primary business is attracting retail deposits from the general public through the six full-service banking offices of

Brookline and via the internet. The Company invests those deposits and other borrowed funds primarily in real estate mortgage loans and

various debt and equity securities. The Company emphasizes the origination of multi-family and commercial real estate mortgage loans

as well as one-to-four family residential mortgage loans. The Companys consolidated net income depends largely upon net interest

income, which is the difference between interest income from loans and investments (interest-earning assets) and interest expense on

deposits and borrowed funds (interest-bearing liabilities). Net interest income is significantly affected by general economic conditions,

policies established by regulatory authorities and competition.

The following discussion contains forward-looking statements based on managements current expectations regarding economic,

legislative and regulatory issues that may impact the Companys earnings in future periods. Any statements contained herein that are not

statements of historical fact may be deemed to be forward-looking statements. Without limitation, the words believes, anticipates,

plans, expects and similar expressions are intended to identify forward-looking statements. There are a number of important factors

that could cause the Companys actual results to differ materially from those contemplated by such forward-looking statements. These

important factors include, without limitation: general economic conditions, changes in interest rates, regulatory considerations, competition,

technological developments, retention and recruitment of qualified personnel and market acceptance of the Companys pricing, products

and services.

The discussion and analysis that follows focuses on the factors affecting the Companys consolidated financial condition at December

31, 2001 and 2000 and consolidated results of operations during 2001, 2000 and 1999. The consolidated financial statements and relatednotes appearing elsewhere in this annual report should be read in conjunction with this review.


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8

Comparison of Financial Condition at December 31, 2001 and 2000

Total assets increased $63.4 million, or 6.1%, from $1.036 billion at December 31, 2000 to $1.100 billion at December 31, 2001.

Excluding money market loan participations, the loan portfolio amounted to $828.4 million at December 31, 2001, an increase of

$111.8 million, or 15.6% since December 31, 2000. Approximately $45 million of the loan growth was in the residential mortgage loan

sector, much of which occurred through real estate broker relationships established through Lighthouse. Loan growth at Brookline was

primarily in the multi-family mortgage sector ($38 million), the commercial real estate mortgage sector ($16 million) and the commercial

loan sector ($9 million). Much of the commercial loan business relates to financing of condominium association renovation projects. The

level of loan growth, especially in the residential mortgage loan sector, is expected to decline in 2002. With the merger of Lighthouse

into Brookline, reliance on real estate brokers to provide new residential mortgage loans has been greatly diminished.

Money market loan participations declined from $28.3 million at December 31, 2000 to $6.0 million at December 31, 2001. Generally,

the participations represent purchases of a portion of loans to national companies and organizations originated and serviced by money

center banks that mature between one day and three months. The Company views such participations as an alternative to lower-yielding

short-term investments. Currently, the Company is placing less funds in this type of investment because of a shortage in the number of

quality issues available and the low yields offered on such issues.

While the amount of the Company's short-term investments grew modestly from $66.9 million at the end of 2000 to $69.4 million at

the end of 2001, the composition of the investments changed significantly. Commercial paper investments declined from 47% of the

year-end 2000 portfolio to 9% of the year-end 2001 portfolio. Over 52% of the year-end 2001 portfolio was invested in overnight

deposits at the Federal Home Loan Bank of Boston ("FHLB") compared to 13% of the year-end 2000 portfolio.

Securities available for sale ($163.4 million) and securities held to maturity ($9.6 million) represented 15.7% of total assets at

December 31, 2001 while securities available for sale ($149.4 million) and securities held to maturity ($50.4 million) represented

19.3% of total assets at December 31, 2000. As the economy faltered in 2001, the investment ratings of many corporate debt securities

were downgraded. As a result, the Company reduced its holdings of corporate obligations from $93.7 million at the beginning of 2001 to

$58.9 million at the end of 2001 and increased its investment in collateralized mortgage obligations from $68.5 million at the beginningof 2001 to $79.7 million at the end of 2001. Most of the corporate obligations mature within two years and the collateralized mortgage

obligations generally mature within three or four years.

Marketable equity securities included net unrealized gains of $7.7 million at December 31, 2001 and $9.2 million at December 31, 2000.

While unrealized gains declined $1.5 million in 2001, sales of marketable equity securities resulted in realized gains of

$4.0 million in 2001. The portfolio is comprised primarily of common stocks of national, regional money center and community banks

and utility companies. The single largest investment in the portfolio at December 31, 2001 is in the common stock of a Massachusetts

community bank with a market value of $8.2 million at December 31, 2001.

Total deposits were $620.9 million at December 31, 2001 compared to $608.6 million at December 31, 2000, an increase of $12.3 million,

or 2.0%. This net increase resulted from growth of core transaction deposit accounts of $67.3 million, or 22.5%, and a decline of $55.0million, or 17.8%, in certificates of deposit. The decline resulted primarily from significant reductions in rates offered, especially during

the second half of 2001.

Total borrowed funds were $178.1 million at December 31, 2001 compared to $133.4 million at December 31, 2000. All of the borrowed

funds were obtained through advances from the FHLB. The borrowings were used to fund loan growth and in connection with the Company's

management of interest rate sensitivity of its assets and liabilities.


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Total stockholders' equity increased from $282.6 million at December 31, 2000 to $285.4 million at December 31, 2001. The increase was

due primarily to net income exceeding outflows for dividend payments and stock repurchases. The Company purchased 735,450 shares in

2001 at an aggregate cost of $10.8 million, or $14.72 per share. As of December 31, 2001, the Company can purchase an additional

894,915 shares under a repurchase plan approved by the Board of Directors. Since becoming a public company in March 1998, the

Company has repurchased 3,468,364 shares (including 546,986 for the ESOP) at an aggregate cost of $40.4 million, or $11.65 per share.

Non-Performing Assets

The following table sets forth information regarding non-performing assets, restructured loans and the allowance for loan losses:

At December 31, 2001 2000 1999 1998 1997

(Dollars in thousands)

Non-accrual loans (1):

Mortgage loans:

One-to-four family $ 136 $ - . $ - . $ - . $ 230Multi-family - . - . - . - . - .

Commercial real estate - . - . - . 297 522

Construction and development - . - . - . - . - .

Home equity - . - . - . 35 51

Commercial loans - . - . - . - . - .

Consumer loans 4 . - . - . - . - .

Total non-accrual loans 140 - . - . 332 803

Other real estate owned, net (2) - . - . 707 1,940 2,373

Defaulted corporate debt security 1,440 - . - . - . - .

Total non-performing assets $ 1,580 $ - . $ 707 $ 2,272 $ 3,176

Restructured loans $ - . $ - . $ - . $ - . $ 2,287

Allowance for loan losses as a percent

of total loans 1.83% 1.92% 2.13% 2.21% 2.51%

Allowance for loan losses as a percent

of total non-performing loans (3) NM NM NM 3,943.98 1,552.05

Non-performing loans as a percent

of total loans 0.02 - . - . 0.06 0.16

Non-performing assets as a percent

of total assets 0.14 - . 0.08 0.26 0.45

(1) Non-accrual loans include all loans 90 days or more past due and other loans which have been identified by the Company

as presenting uncertainty with respect to the collectibility of interest or principal.

(2) Other real estate owned balances are shown net of related loss allowances.

(3) Non-performing loans are comprised of non-accrual loans.

NM = not meaningful


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1 0

In the second quarter of 2001, the Company charged earnings $495,000 to recognize an other than temporary impairment in the carrying

value of a $2.0 million bond issued by Southern California Edison that matured on June 1, 2001. Interest of $65,000 due on the bond

was received at the maturity date and applied as a reduction of the carrying value of the bond instead of being credited to interest

income. An interest payment of $65,000 received on December 1, 2001 was credited to interest income. At December 31, 2001, the

defaulted bond was carried on the books of the Company at $1,440,000 and had a market value of $1,950,000. Repayment of the debt

security will depend on resolution of issues related to the energy crisis in California.

Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal or

automatically when a loan becomes past due 90 days.

Restructured loans represent performing loans for which concessions (such as reductions of interest rates to below market terms

and/or extension of repayment terms) were granted due to a borrower's financial condition. Based on satisfactory payment performance,

a significant pay-down of loan principal and payment of interest at market rates, loans previously classified as restructured were removed

from that category in 1998.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses based on managements on-going evaluation of the risksinherent in the Company's loan portfolio. Factors considered in the evaluation process include growth of the loan portfolio, the risk characteristics

of the types of loans in the portfolio, geographic and large borrower concentrations, current regional economic and real estate market

conditions that could affect the ability of borrowers to pay, the value of underlying collateral, and trends in loan delinquencies and

charge-offs. The significance of any factor at a particular point in time fluctuates depending on managements assessment of circumstances.

The Company utilizes an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. At the time of loan

approval, all loans other than one-to-four family residential mortgage loans, home equity loans and consumer loans, are assigned a rating

based on all the factors considered in originating the loan. The initial loan rating is recommended by the loan officer and approved by

the individuals or committee responsible for approving the loan. Loan officers are expected to recommend to the Loan Committee

changes in loan ratings when facts come to their attention that warrant an upgrade or downgrade in a loan rating. Problem and potential

problem assets are assigned the three highest ratings. Such ratings coincide with the "Substandard", "Doubtful" and "Loss" classifications

used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequatelyprotected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those

characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as

Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make

collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are

those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve

and/or charge-off is not warranted. Assets which do not currently expose the Company to sufficient risk to warrant classification in one

of the aforementioned categories but possess weaknesses are designated "Special Mention". The Company assigns its fourth highest

rating to loans meeting this designation.

On a quarterly basis, management reviews with the Watch Committee the status of each loan assigned one of the Companys four

adverse internal ratings and the judgments made in determining specific and general valuation allowances for losses. General valuation

allowances represent loss allowances established to recognize the inherent risk associated with lending activities which, unlike specific

allowances, have not been allocated to particular problem loans. Loans, or portions of loans, classified Loss are either charged off against

valuation allowances or a specific allowance is established in an amount equal to the amount classified Loss.

At December 31, 2001 and 2000, there were no loans which warranted specific reserves. At December 31, 2001, loans designated as

Special Mention amounted to $105,000; at December 31, 2000, loans designated as Special Mention and Substandard amounted to

$10.7 million and $107,000, respectively. No loans were designated as Doubtful or Loss. The Substandard category at December 31, 2001

and 2000 included two loans secured by condominiums. The Special Mention category at December 31, 2000 included eleven loans to

one borrower secured by multi-family and commercial real estate properties. In 2001, classification of the eleven loans as Special

Mention was removed due to satisfactory performance. All of the loans designated Special Mention and Substandard at December 31, 2001

and 2000 were current in their payment status.


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1

The Company's classification of its loans and the amount of the valuation allowances it sets aside for estimated losses are subject to

review by the banking agencies. Based on their reviews, these agencies can order the establishment of additional general or specific loss

allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on allowances

for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for

the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy

of a financial institution's valuation methodology. Generally, the policy statement recommends that financial institutions have effective

systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect

the collectibility of the portfolio in a reasonable manner; and that management establish acceptable valuation processes that meet the

objectives set forth in the policy statement. While the Company believes that it has established an adequate allowance for loan losses,

there can be no assurance that the regulators, in reviewing the Company's loan portfolio, will not request the Company to materially

increase its allowances for loan losses. Although management believes that adequate specific and general loan loss allowances have

been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loss

allowances could become necessary.

The following table sets forth activity in the Companys allowance for loan losses for the years presented in the table.

Year Ended December 31, 2001 2000 1999 1998 1997

(In thousands)

Balance at beginning of year $ 14,315 $ 13,874 $ 13,094 $ 12,463 $ 12,326

Provision for loan losses 974 427 450 300 - .

Charge-offs:

Mortgage loans - . - . - . - . - .

Commercial loans - . - . - . - . - .

Consumer loans 4 10 - . 1 6

Money market loan participations - . - . - . - . - .

Total charge-offs 4 10 - . 1 6

Recoveries:

Mortgage loans:Multi-family 6 6. 2 . 1 25

Commercial real estate 7 . 7. 325 314 8

Construction and development - . - . - . - . 103

Commercial loans - . - . - . 12 - .

Consumer loans 3 11 3 5 7

Total recoveries 16 24 330 332 143

Net recoveries 12 14 330 331 137

Balance at end of year $ 15,301 $ 14,315 $ 13,874 $ 13,094 $ 12,463

The Company has experienced recoveries in excess of charge-offs in each of the past five years. The Company believes this favorable

experience is attributable to the robust economy during that time and is not sustainable over normal lending cycles. When the economy

is strong, an inherent higher level of risk continues to exist because of the long-term nature of the Companys loan portfolio. Multi-family

and commercial real estate loans have comprised over 70% of the Companys total loans outstanding for many years. These loans tend to

have an average life of several years. The higher level of risk in such loans becomes more evident when the economy weakens.


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1 2

During 2001, 2000 and 1999, the allowance for loan losses was increased by $986,000, $441,000 and $780,000, respectively, as a

result of net loan recoveries of $12,000, $14,000 and $330,000, respectively, and provision for loan losses of $974,000, $427,000 and

$450,000, respectively. The increases in the allowance were made primarily because of significant growth of the loan portfolio. Total

loans outstanding increased by $111.8 million in 2001, $81.0 million in 2000 and $87.0 million in 1999, exclusive of money market

loan participations. Approximately 57% of the net loan growth in 2001, half of the net loan growth in 2000 and most of the net loangrowth in 1999 occurred in the higher risk categories of commercial real estate and multi-family mortgage loans. The remainder of the

growth was primarily in the residential mortgage loan category.

The following tables set forth the Company's percent of allowance by loan category and the percent of loans to total loans in each of the

categories listed at the dates indicated.

At December 31, 2001 2000 1999

(Dollars In thousands) Percent Percent Percent

of Loans of Loans of Loans

Percent of in Each Percent of in Each Percent of in Each

Allowance Category Allowance Category Allowance Category

to Total to Gross to Total to Gross to Total to GrossAmount Allowance Loans Amount Allowance Loans Amount Allowance Loans

Mortgage loans:

One-to-four family $ 483 3.16% 18.25% $ 343 2.40% 15.04% $ 225 1.62% 11.13%

Multi-family 3,142 20.53 38.70 2,696 18.83 39.55 2,756 19.86 44.18

Commercial real estate 3,267 21.35 31.06 3,104 21.68 33.65 2,698 19.45 32.89

Construction and development 478 3.12 2.39 466 3.26 2.62 547 3.95 3.67

Home equity 89 0.58 1.02 66 0.46 0.87 58 0.42 0.86

Second 284 1.86 3.36 225 1.57 3.58 122 0.88 2.43

Commercial loans 512 3.35 4.87 389 2.72 4.36 357 2.57 4.54

Consumer loans 31 0.20 0.35 25 0.17 0.33 20 0.14 0.30

Money market loan participations - . - . - . - . - . - - . - . - .

Unallocated 7,015 45.85 - . 7,001 48.91 - 7,091 51.11 - .

Total allowance for loan losses $ 15,301 100.00% 100.00% $ 14,315 100.00% 100.00% $13,874 100.00% 100.00%

At December 31, 1998 1997

(Dollars In thousands) Percent Percent

of Loans of Loans

Percent of in Each Percent of in Each

Allowance Category Allowance Category

to Total to Gross to Total to Gross

Amount Allowance Loans Amount Allowance Loans

Mortgage loans:

One-to-four family $ 193 1.47% 11.19% $ 207 1.66% 14.25%

Multi-family 2,367 18.08 45.58 1,943 15.59 45.50

Commercial real estate 2,600 19.86 34.29 2,199 17.65 30.94

Construction and development 376 2.87 2.99 287 2.30 2.77

Home equity 55 0.42 0.96 53 0.43 1.09

Second 105 0.80 2.42 119 0.95 3.28

Commercial loans 180 1.37 2.26 99 0.79 1.88

Consumer loans 18 0.14 0.31 14 0.11 0.29

Money market loan participations . - . - . - . - . - . - .

Unallocated 7,200 54.99 - . 7,542 60.52 - .

Total allowance for loan losses $ 13,094 100.00% 100.00% $12,463 100.00% 100.00%


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1

The long-term nature of the Companys loan portfolio as well as the impact of economic changes make it most difficult, if not impossible,

to conclude with precision the amount of loss inherent in the Banks loan portfolio at a point in time. Ultimately, the balance of the

allowance for loan losses is determined by evaluating several factors quantitatively and qualitatively and must be based on a positive

response to the following questions:

Is the allowance adequate in relation to the estimated losses in the loan portfolio?

Is the provision for loan losses charged to operations reasonable in relation to the level of loss exposure resulting

from changes and trends in the loan portfolio?

The amounts allocated to loan categories in the above table are determined by consideration of several factors. Specific amounts are

allocated on a loan-by-loan basis for any impairment loss as determined by applying one of the three methods cited in generally accepted

accounting principles. In addition, general reserves are established based on the Companys long-term experience in loan charge-offs

by category, delinquencies and the total of loans according to the Companys internal ratings. The reserve factors applied to calculate

general reserves are in line with ranges allowed by regulatory examiners.

Typically, new loans are rated 1, 2 or 3, with 3 being the rating most frequently assigned. Loans rated 1 and 2 are considered to have less

risk exposure than loans rated 3. Over the long-term life cycle of the Companys loan portfolio, the rating of a loan can change resultingin it being placed on the Companys Watch List. During the last economic downturn (1990 through 1994), the total of Watch List loans

ranged from approximately 7% to 10% of total loans in the higher risk categories. When the total of Watch List loans is high, reserves

assigned to such loans tend to be specific and based on a loan-by-loan assessment. During the most recent five year period, the percent

of total Watch List loans to total higher risk loans declined substantially due to the very strong economy.

Based on the Companys experience during the last economic downturn, it is known that loans in the higher risk categories have inherent

characteristics that result in their being placed on the Watch List when the economy weakens. Such risk characteristics, which exist

throughout the long-term life of the Companys loans, are less obvious in good economic times. Management believes that the allowance

for loan losses should include general reserves for the inherent risk in the loan portfolio when the economy is strong and Watch List

loans are lower than normal. Accordingly, when Watch List loans are less than 10% of total loans in the higher risk categories, a general

reserve is established equal to 3.0% of the difference between 10% of adjusted higher risk loans and the actual amount of Watch List

loans. Adjusted higher risk loans equals the total of loans in the higher risk categories less the total of loans rated 1 and 2. Loans withsuch ratings are far less likely to be included on the Watch List. A rate higher than 3.0% is used when management believes trends

suggest higher loss exposure. The amount of general reserves allocated as a result of applying this methodology was $1,231,000 at

December 31, 2001, $878,000 at December 31, 2000 and $1,005,000 at December 31, 1999.

For the past several years, a portion of the Company's allowance for loan losses has been categorized as unallocated rather than being

allocated to specific loan categories. The unallocated part of the allowance has been maintained in recognition of the inherent risks

resulting from the following concentrations in the Company's portfolio: the significance of loans in the higher risk categories of multi-

family, commercial real estate and construction mortgage loans and other commercial loans, concentrations in the geographic locations

of properties on which such loans have been made and the aggregate amount of loans outstanding to larger borrowers. The combination

of these three concentrations creates a higher than normal degree of risk in the Company's loan portfolio. The unallocated portion of

the allowance tends to be a greater percent of the total allowance in periods when the economy is strong. A downturn in economic

conditions in the Company's primary lending area could have adverse consequences on the collectibility of the loan portfolio in a

relatively short period of time. In such circumstances, inherent risks tend to be transformed into specifically quantified risks on a

loan-by-loan basis.

The Company has no established range into which the unallocated portion of the allowance should fall. Instead, the reasonableness of the

unallocated portion is considered based on managements collective assessment of all the factors cited in the beginning of this section.

As noted in the table above, the unallocated portion of the allowance has remained in the range of $7.0 million to $7.5 million over the

past five years. The narrowness of the range is attributable primarily to the strength of the economy and the quality of the loan portfolio

during that time.


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1 4

Average Balance Sheets and Interest Rates

The following table sets forth certain information relating to the Company for the years ended December 31, 2001, 2000 and 1999. The

average yields and costs are derived by dividing interest income or interest expense by the average balance of interest-earning assets or

interest-bearing liabilities, respectively, for the years shown. Average balances are derived from average daily balances. The yields and

costs include fees which are considered adjustments to yields.

Year Ended December 31, 2001 2000 1999

(Dollars In thousands) Average Average Average

Average Yield/ Average Yield/ Average Yield/

Balance Interest (1) Cost Balance Interest (1) Cost Balance Interest (1) Cost

Assets:

Interest-earning assets:

Short-term investments $ 45,122 $ 1,936 4.29% $ 19,628 $ 1,235 6.29% $ 12,809 $ 634 4.95%

Debt securities (2) 165,172 10,189 6.17 179,992 11,081 6.16 220,749 12,795 5.80

Equity securities (2) 29,846 1,380 4.62 31,054 1,716 5.53 38,144 1,564 4.10

Mortgage loans (3) (4) 765,265 59,476 7.77 643,815 53,522 8.31 577,461 46,928 8.13

Money market loan participations 20,741 1,017 4.90 30,696 2,054 6.69 29,618 1,539 5.20Other commercial loans (3) 27,741 1,908 6.88 24,808 2,066 8.33 16,255 1,254 7.71

Consumer loans (3) 2,959 297 10.04 2,183 214 9.80 1,922 181 9.42

Total interest-earning assets 1,056,846 76,203 7.21 932,176 71,888 7.71 896,958 64,895 7.24

Allowance for loan losses (14,855) (14,136) (13,441)

Non-interest earning assets 29,176 26,528 17,867

Total assets $1,071,167 $ 944,568 $ 901,384

Liabilities and Stockholders Equity:

Interest-bearing liabilities:

Deposits:

NOW accounts (5) $ 68,968 $ 815 1.18% $ 50,843 $ 690 1.36% $ 43,897 $ 542 1.23%

Savings accounts 12,469 225 1.80 12,180 268 2.20 13,010 289 2.22

Money market savings accounts 240,177 7,856 3.27 206,093 8,140 3.95 190,813 7,434 3.90

Certificate of deposit accounts 277,273 14,664 5.29 253,705 14,136 5.57 242,188 12,443 5.14Total deposits 598,887 23,560 3.93 522,821 23,234 4.44 489,908 20,708 4.23

Borrowed funds 153,002 9,344 6.11 120,023 7,338 6.11 106,812 6,454 6.04

Total interest-bearing liabilities 751,889 32,904 4.38 642,844 30,572 4.76 596,720 27,162 4.55

Non-interest-bearing demand

checking accounts 17,732 14,309 12,387

Other liabilities 14,594 11,177 14,069

Total liabilities 784,215 668,330 623,176

Stockholders equity 286,952 276,238 278,208

Total liabilities and

stockholders equity $1,071,167 $ 944,568 $ 901,384

Net interest income (tax equivalent

basis)/interest rate spread (6) 43,299 2.83% 41,316 2.95% 37,733 2.69%

Less adjustment of tax exempt income 243 328 318

Net interest income (4) $ 43,056 $ 40,988 $ 37,415Net interest margin (7) 4.10% 4.43% 4.21%

(1) Tax exempt income on equity securities is included on a tax equivalent basis.

(2) Average balances include unrealized gains on securities available for sale. Equity securities include marketable equity securities (preferred and common stocks)

and restricted equity securities.

(3) Loans on non-accrual status are included in average balances.

(4) Excluded from interest income for the year ended December 31, 1999 is $232 collected from borrowers whose loans were on non-accrual and which relate to interest

earned in periods prior to January 1, 1999.

(5) Savings accounts include mortgagors' escrow accounts.

(6) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(7) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.


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1

Interest Rate Spread. Interest rate spread is the difference between yields earned on interest-earning assets and rates paid on

interest-bearing liabilities. Interest rates earned are influenced greatly by the actions of the Federal Reserve in establishing the

benchmark federal funds rate for overnight loans between banks. From near the end of June through November 1999, the federal

funds rate was increased by 50 basis points. In each of the first two quarters of 2000, the federal funds rate was increased by 50 basis

points. In 2001, the federal funds rate was cut eleven times for an aggregate reduction of 150 basis points in the first quarter, 125basis points in the second quarter, 75 basis points in the third quarter and 125 basis points in the fourth quarter. The 2001 reductions

represent the most aggressive pace of cuts by the Federal Reserve since 1982 and the last cut in December resulted in the lowest rate

(1.75%) in forty years. The impact of rate changes on operating results varies depending on the maturity and date of repricing of the

Company's loans, investments, deposits and borrowed funds.

Interest rate spread improved from 2.69% in 1999 to 2.95% in 2000 and declined to 2.83% in 2001. The improvement in 2000

was due in part to (a) the Company's assets repricing upward more quickly than the Company's liabilities as the federal funds rate

increased and (b) an increase in the percent of average loans outstanding to total average interest-earning assets from 66% in 1999

to 72% in 2000. Generally, yields earned on loans exceed yields earned on investments. While interest rate spread was higher in 2000

than in 2001, the spread started a downward trend in the fourth quarter of 2000. Interest rate spread declined from 3.05% in the third

quarter of 2000 to 2.86% in the fourth quarter of 2000 and to 2.68% in the first quarter of 2001. This downward trend was causedprimarily by an influx of term certificates of deposit in 2000 on which higher rates were paid. As a result, the cost of liabilities

accelerated more quickly than the increase in yield on assets. Interest rate spread started to improve in the second quarter of 2001

as high cost term certificates of deposit matured and were replaced with lower costing deposits. Interest rate spread was 2.97% in

the fourth quarter of 2001.

It is expected that the rate reductions initiated by the Federal Reserve in 2001 will continue to cause a decline in the average yield on

the Company's earning assets and in the rates paid on deposits and borrowed funds. The impact of these expected changes on interest

rate spread will depend on the maturities and dates of repricing of the Company's loans, investments, deposits and borrowed funds.

Net Interest Margin. Net interest margin, which represents net interest income (on a tax equivalent basis), divided by interest-

earning assets, increased from 4.21% in 1999 to 4.43% in 2000 and declined to 4.10% in 2001. The fluctuations were due primarilyto the factors described in the preceding section and a decline in the ratio of interest-earning assets to interest-bearing liabilities from

150% in 1999 to 145% in 2000 and 141% in 2001.


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1 6

Rate/Volume Analysis

The following table presents, on a tax equivalent basis, the extent to which changes in interest rates and changes in volume of interest-

earning assets and interest-bearing liabilities have affected the Companys interest income and interest expense during the years indicated.

Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by

prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes

attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the

changes due to rate.

Year Ended December 31, 2001 Year Ended December 31, 2000

Compared to Year Ended Compared to Year Ended

December 31, 2000 December 31, 1999

Increase Increase

(Decrease) Due to (Decrease) Due to

Volume Rate Net Volume Rate Net

(In thousands)

Interest income:

Short-term investments $ 1,194 $ (493) $ 701 $ 398 $ 203 $ 601

Debt securities (914) 22 (892) (2,472) 758 (1,714)

Equity securities (65) (271) (336) (326) 478 152

Mortgage loans 9,608 (3,654) 5,954 5,496 1,098 6,594

Money market loan participations (569) (468) (1,037) 58 457 515

Other commercial loans 227 (385) (158) 705 107 812

Consumer loans 78 5 83 25 8 33

Total interest income 9,559 (5,244) 4,315 3,884 3,109 6,993

Interest expense:

Deposits:

NOW accounts 223 (98) 125 91 57 148

Savings accounts 6 (49) (43) (18) (3) (21)

Money market savings accounts 1,233 (1,517) (284) 602 104 706

Certificate of deposit accounts 1,270 (742) 528 610 1,083 1,693

Total deposits 2,732 (2,406) 326 1,285 1,241 2,526

Borrowed funds 2,014 (8) 2,006 807 77 884

Total interest expense 4,746 (2,414) 2,332 2,092 1,318 3,410

Net change in net interest income $ 4,813 $(2,830) $ 1,983 $ 1,792 $1,791 $ 3,583


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1

Quantitative and Qualitative Disclosure About Market Risk

Market risk is the risk of loss from adverse changes in market prices and/or interest rates. Since net interest income (the differential or

spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Companys primary

source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest

income is affected by changes in interest rates as well as fluctuations in the level and duration of the Companys assets and liabilities.

Interest rate risk is the exposure of the Companys net interest income to adverse movements in interest rates. In addition to directly

impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to

repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as

available for sale and the flow and mix of deposits.

The Companys Asset/Liability Committee, comprised of several members of senior management, is responsible for managing interest

rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and

capital. The Committee reviews with the Board of Directors on a quarterly basis its activities and strategies, the effect of those strategies

on the Companys operating results, the Companys interest rate risk position and the effect subsequent changes in interest rates could

have on the Companys future net interest income. The Committee is actively involved in the planning and budgeting process as well as

in the setting of pricing for the Companys loan and deposit products.

The Committee manages interest rate risk through use of both earnings simulation and GAP analysis. Earnings simulation is based on

actual cash flows and assumptions of management about future changes in interest rates and levels of activity (loan originations, loan

prepayments and deposit flows). The assumptions are inherently uncertain and, therefore, actual results will differ from simulated results

due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and strategies. The net interest

income projection resulting from use of actual cash flows and managements assumptions (Base Case) is compared to net interest

income projections based on an immediate shift of 200 basis points upward or downward in the first year of the model (Interest Rate

Shock). The following table indicates the estimated impact on net interest income over a one year period under scenarios of a 200 basis

points change upward or downward as a percentage of Base Case earnings projections.

Estimated Percentage ChangeChanges in Interest Rates (Basis Points) in Future Net Interest Income

+200 over one year (6.25)%

Base Case -

-200 over one year 0.59 %

The Companys interest rate risk policy states that an immediate 200 basis points change upward or downward should not negatively

impact estimated net interest income over a one year period by more than 15%.

The results shown above are based on the assumption that there are no significant changes in the Companys operating environment and

that short-term interest rates will increase 50 basis points over the next year. Further, in the case of the 200 basis points downward

adjustment, it was assumed that it would not be possible to reduce the rates paid on certain deposit accounts by 200 basis points. Instead,it was assumed that NOW accounts would be reduced by 25 basis points, savings accounts by 100 basis points and money market sav-

ings accounts by 131 basis points. There can be no assurance that the assumptions used will be validated in 2002.

GAP analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive

position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons,

which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of

falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a

positive impact in periods of falling rates. GAP analysis has limitations because it cannot measure the effect of interest rate movements and

competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities.


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1 8

The table below shows the Companys interest rate sensitivity gap position as of December 31, 2001. NOW accounts, savings accounts

and money market savings accounts are immediately withdrawable and the rates paid on such accounts can be changed at any time.

Accordingly, they are included in the one year or less period even though management considers it unlikely that such deposits will be

immediately withdrawn.

At December 31, 2001

(Dollars in thousands)More More More More More

Than One Than Two Than Three Than Four Than FiveOne Year to Years to Years Years Years MoreYear Two Three to Four to Five to Ten Than

or Less Years Years Years Years Years Ten Years Total

Interest-earning assets (1):

Short-term investments $ 69,432 $ - . $ - . $ - . $ - . $ - . . $ - . $ 69,432

Weighted average rate 1.75%

Debt securities (2) 68,865 49,135 28,898 1,053 702 387 3,882 152,922

Weighted average rate 6.51% 6.19% 4.87% 6.97% 5.77% 6.09% 7.85%

Mortgage loans (3) 236,835 116,142 99,541 100,443 155,380 79,877 6,150 794,368


Money market loan participations 6,000 - . - . - . - . - . - . 6,000Weighted average rate 1.95%

Other loans (3) 33,003 196 204 214 217 422 - . 34,256

Weighted average rate 5.52% 12.30% 13.75% 15.04% 13.47% 8.97%

Total interest-earning assets 414,135 165,473 128,643 101,710 156,299 80,686 10,032 1,056,978


Interest-bearing liabilities:

NOW accounts 75,439 - . - . - . - . - . - . 75,439


Savings accounts (4) 12,951 - . - . - . - . - . - . 12,951


Money market savings accounts 259,695 - . - . - . - . - . - . 259,695


Certificate of deposit accounts 193,429 39,350 11,262 7,341 2,998 - . - . 254,380

Weighted average rate 4.16% 4.93% 4.94% 6.38% 5.23%

Borrowed funds 11,300 32,950 32,000 43,000 47,880 11,000 - . 178,130


Total interest-bearing liabilities 552,814 72,300 43,262 50,341 50,878 11,000 - . 780,595


Interest sensitivity gap (5) (138,679) 93,173 85,381 51,369 105,421 69,686 10,032 276,383

Impact of interest rate swap (5,000) - . - . 5,000 - . - . - .

Weighted average rate 2.43% 5.94%

Adjusted interest sensitivity gap $ (133,679) $ 93,173 $ 85,381 $ 46,369 $ 105,421 $ 69,686 $ 10,032 $ 276,383

Cumulative interest sensitivity gap $ (133,679) $ (40,506) $ 44,875 $ 91,244 $ 196,665 $266,351 $ 276,383

Cumulative interest sensitivity gap

as a percentage of total assets (12.16)% (3.68)% 4.08% 8.30% 17.89% 24.22% 25.13%

Cumulative interest sensitivity

gap as a percentage of total

interest-earning assets (12.65)% (3.83)% 4.25% 8.63% 18.61% 25.20% 26.15%

(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments,

scheduled rate adjustments and contractual maturities.

(2) Debt securities include all debt securities. The unrealized gain on securities, all other marketable equity securities and restricted equity securities are excluded.

(3) For purposes of the gap analysis, the allowance for loan losses, deferred loan fees and non-performing loans have been excluded.

(4) Savings accounts include interest-bearing mortgagors escrow accounts.

(5) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.


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2 0



Interest Expense. Interest expense on deposits was $23.6 million in 2001, a 1.4% increase from the $23.2 million expended in 2000.

The additional expense resulting from an increase in average interest-bearing deposits outstanding of $76.1 million, or 14.5%, between

the two years was substantially offset by a decline in the average rate paid on such deposits from 4.44% in 2000 to 3.93% in 2001.

The decline in rates resulted primarily from the actions of the Federal Reserve described earlier herein and the movements in deposits

mentioned in the second preceding paragraph above.

Average borrowings from the FHLB increased from $120.0 million in 2000 to $153.0 million in 2001. The average rate paid on those

borrowings remained at 6.11% in 2000 and 2001. Borrowings from the FHLB are usually obtained in connection with the Company's

management of interest rate risk.

Provision for Loan Losses. The Company provided $974,000 for loan losses in 2001 and $427,000 in 2000. The provisions were made

in light of the growth by category in the loan portfolio.

Non-Interest Income. Net securities gains were $3.5 million in 2001 compared to $8.3 million in 2000. In 2001, the Company recognized

a gain of $3.7 million from termination of Brookline's defined benefit pension plan.

Fees and charges increased from $1.0 million in 2000 to $1.9 million in 2001 primarily as a result of higher fees from mortgage loan

prepayments ($730,000 in 2001 compared to $32,000 in 2000) and from deposit services ($849,000 in 2001 compared to $613,000 in 2000).

In 2001, $241,000 was charged to earnings in connection with accounting for the Company's outstanding swap contract on a fair value basis.

Non-Interest Expense.Excluding a restructuring charge of $3.9 million in 2001, the total of Lighthouse-related expenses charged to

Lighthouse and Brookline during 2001 was $4.0 million compared to $4.9 million in 2000. See notes 18 and 19 of the notes to consolidated

financial statements presented elsewhere in this report for further information about Lighthouse's expenses.

Expense related to the recognition and retention plan ("RRP") approved by stockholders in 1999 was $167,000 in 2001 compared

to $1.2 million in 2000. RRP expense is allocated to the periods over which the underlying shares awarded vest.

Excluding RRP and Lighthouse-related expenses, total non-interest expense increased $2.0 million, or 19.2%, from $10.6 million in 2000

to $12.6 million in 2001. Of the increase, $907,000 related to personnel costs. The fourth quarter of 2001 included salary and benefits to

former Lighthouse employees who joined Brookline. Costs related to a new branch were incurred throughout 2001 and only for part of

the fourth quarter of 2000. Replacement of Brookline's defined benefit pension plan with a defined contribution plan resulted in a

$256,000 increase in pension expense and the expense of the ESOP increased $98,000 primarily because of the 44% rise in the market

value of the Company's common stock during 2001. (ESOP expense is determined by the market value of the Company's stock).

Equipment and data processing costs increased $591,000 due primarily to the servicing of former Lighthouse customers by Brookline

in the fourth quarter of 2001, higher website and ATM servicing costs and expenses related to a new teller platform, asset/liability

management software and equipment purchased for a new branch. Higher expenses were also incurred for regulatory assessments

due to the change to a federal charter and occupancy due to rent escalations on existing premises and the addition of a new branch.

Income Taxes. The effective rate of income taxes was 36.7% in 2001 compared to 35.7% in 2000. The increase was attributable

primarily to the non-deductibility of a $587,000 excise tax payable to the federal government in connection with the termination of

Brookline's defined benefit pension plan.


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2



Comparison of Operating Results for the Years Ended December 31, 2000 and December 31, 1999

General. Net income for the year ended December 31, 2000 was $21.6 million, or $0.80 per share, compared to $20.8 million, or

$0.74 per share for the year ended December 31, 1999, an improvement of 4.1% (8.1% on a per share basis). Basic and diluted earnings

per share were the same in each year. The higher rate of per share improvement resulted primarily from less shares outstanding due to

stock repurchases.

The 2000 and 1999 years included gains from sales of marketable equity securities of $8.3 million ($5.2 million on an after-tax basis,

or $0.19 per share) and $7.4 million ($4.5 million on an after-tax basis, or $0.16 per share), respectively, and expense related to the

recognition and retention plan (RRP) approved by stockholders of $1.2 million ($725,000 on an after-tax basis, or $0.03 per share) and

$3.6 million ($2.1 million on an after-tax basis, or $0.08 per share), respectively. The 2000 and 1999 years also included on an after-tax

basis $2.5 million, or $0.09 per share, and $392,000, or $0.01 per share, respectively, of net loss related to the operations and start-up of

Lighthouse. Excluding securities gains, the expense of the RRP and Lighthouse's net losses, and adding back foregone income on the

Company's investment in Lighthouse, net operating income was $20.3 million, or $0.76 per share, in 2000 compared to $18.7 million,

or $0.67 per share, in 1999, an increase of 8.5% (13.4 % on a per share basis).

Interest Income. Total interest income was $71.6 million in 2000 compared to $64.8 million in 1999, an increase of $6.8 million, or

10.4%. The additional income resulted from growth in the average amount of interest-earning assets ($35.2 million, or 3.9%) between the

two years and an improvement in the average yield earned on assets from 7.24% in 1999 to 7.71% in 2000.

Interest income on loans, excluding interest on money market loan participations, was $55.8 million in 2000 compared to $48.6 million

in 1999, an increase of $7.2 million, or 14.8%. The improvement resulted from $75.2 million, or 12.6%, of growth in the average amount

of loans outstanding between the two years and an increase in the average yield earned on loans from 8.12% in 1999 to 8.32% in 2000.

The higher yield was attributable primarily to the six separate increases in the federal funds rate by the Federal Reserve between June

1999 and May 2000.

Interest income on short-term investments increased $601,000, or 94.8%, as a result of a $6.8 million, or 53.2%, increase in the averagebalance of short-term investments and an increase in yields earned from 4.95% in 1999 to 6.29% in 2000. Interest income on debt securi-

ties decreased $1.7 million, or 13.4%, as the benefit derived from higher yields (6.16% in 2000 compared to 5.80% in 1999) was more

than offset by the effect on revenue of a $40.8 million, or 18.5%, decline in average balances invested in debt securities.

Interest Expense. Interest expense on deposits was $23.2 million in 2000, a 12.2% increase from the $20.7 million expended in 1999.

The increase was due to a $33.0 million, or 6.7%, growth in the average balance of interest-bearing deposits between the two years and

a rise in the average rate paid on such deposits from 4.23% in 1999 to 4.44% in 2000, due in part to the actions of the Federal Reserve

previously mentioned herein and to higher rates offered to customers of Lighthouse and by Brookline in a special certificate of deposit

promotion in November 2000.

Average borrowings from the FHLB increased from $106.8 million in 1999 to $120.0 million in 2000. The average rate paid on thosebalances were 6.04% and 6.11%, respectively.

Provision for Loan Losses. The Company provided $427,000 for loan losses in 2000 and $450,000 in 1999. The provisions were

made in light of the growth by category in the loan portfolio.


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Non-Interest Income. Gains on sales of securities amounted to $8.3 million in 2000 and $7.4 million in 1999. Other real estate owned

income declined from $711,000 in 1999 to $172,000 in 2000. In 1999, a commercial property in foreclosure was sold at a gain of

$615,000, including reversal of a $150,000 valuation allowance previously established for the property. In 2000, the Company sold a

foreclosed property at a gain of $69,000, including reversal of an $86,000 valuation allowance previously established.

Fees and charges increased from $868,000 in 1999 to $1.0 million in 2000 primarily as a result of higher fees from deposit services.

The increase in other income from $98,000 in 1999 to $460,000 in 2000 resulted primarily from $351,000 of income in 2000

($20,000 in 1999) representing the Company's 30.5% equity interest in the earnings of Eastern Funding LLC, a company specializing

in the financing of coin operated laundry and dry cleaning equipment in the greater metropolitan New York area and selected other

locations in the Northeast. The Company made the investment at the end of September 1999.

Non-Interest Expense. Expense related to the RRP amounted to $1.2 million in 2000 and $3.6 million in 1999. Expenses related to

Lighthouse amounted to $4.9 million in 2000, $746,000 of which were start-up expenses, and $675,000 in 1999, all of which were

start-up expenses.

Excluding RRP and Lighthouse expenses, total non-interest expense increased $746,000, or 7.5%. Most of the increase resulted fromhigher personnel costs (up $225,000, or 3.7%), higher marketing expenses (up $214,000, or 42.5%), higher data processing expenses (up

$154,000, or 24.8%) and higher professional fees (up $99,000, or 27.1%). Personnel costs were affected positively by a $68,000 reduction

in pension expense. Marketing efforts were expanded in 2000 so as to attract new deposit customers from other financial institutions going

through divestitures and to promote the new branch opened by Brookline. Data processing expenses were higher because amounts billed

for services in 1999 were discounted from normal rates due to a vendor not meeting certain performance criteria. The higher professional

fees resulted from special corporate initiatives and a review of security controls pertaining to the electronic capabilities of Brookline.

Income Taxes. The effective rate of income taxes was 35.7% in 2000 and 35.3% in 1999. State income taxes remained at low levels in

both years because of the existence of a real estate investment subsidiary and utilization of investment security subsidiaries.

Liquidity and Capital Resources

The Companys primary sources of funds are deposits, principal and interest payments on loans and debt securities and borrowings from

the FHLB. While maturities and scheduled amortization of loans and investments are predictable sources of funds, deposit flows and

mortgage loan prepayments are greatly influenced by interest rate trends, economic conditions and competition.

During the past few years, the combination of generally low interest rates on deposit products and the attraction of alternative invest-

ments such as mutual funds and annuities has resulted in little growth or a net decline in deposits in certain time periods. Based on its

monitoring of historic deposit trends and its current pricing strategy for deposits, management believes the Company will retain a large

portion of its existing deposit base.

From time to time, the Company utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivityof its assets and liabilities. In 2001, the Company repaid advances of $18.5 million and obtained new advances of $63.2 million while

in 2000, the Company repaid advances of $14.3 million and obtained new advances of $38.9 million. Total advances outstanding at

December 31, 2001 amounted to $178.1 million and the Company had the capacity to increase that amount to $311.7 million.

The Companys most liquid assets are cash and due from banks, short-term investments, debt securities and money market loan participations

that generally mature within 90 days. At December 31, 2001, such assets amounted to $90.7 million, or 8.3% of total assets.

At December 31, 2001, Brookline exceeded all regulatory capital requirements. Brooklines Tier I capital was $228.6 million, or 21.8%

of adjusted assets. The minimum required Tier I capital ratio is 4.00%.


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The Board of Directors

Brookline Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Brookline Bancorp, Inc. and subsidiaries

(the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive

income, changes in stockholders equity and cash flows for each of the three years in the period ended December 31, 2001.

These financial statements are the responsibility of the Companys management. Our responsibility is to express an

opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used

and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated

financial position of Brookline Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the

consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended

December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts

January 24, 2002

R E P O R T O F I N D E P E N D E N T

C E R T I F I E D P U B L I C A C C O U N T A N T S


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B R O O K L I N E B A N C O R P, I N C . A N D S U B S I D I A R I E S

C O N S O L I D A T E D B A L A N C E S H E E T S

(In thousands, except share data)

December 31, 2001 2000

Assets

Cash and due from banks $ 13,283 $ 13,505

Short-term investments 69,432 66,870Securities available for sale 163,425 149,361

Securities held to maturity

(market value of $9,766 and $50,337, respectively) 9,558 50,447

Restricted equity securities 9,281 7,145

Loans, excluding money market loan participations 828,360 716,559

Money market loan participations 6,000 28,250

Allowance for loan losses (15,301) (14,315)

Net loans 819,059 730,494

Other investment 3,686 3,360

Accrued interest receivable 5,041 6,521

Bank premises and equipment, net 1,907 3,768Deferred tax asset 4,581 3,999

Other assets 343 680

Total assets $ 1,099,596 $ 1,036,150

Liabilities and Stockholders Equity

Deposits $ 620,920 $ 608,621

Borrowed funds 178,130 133,400

Mortgagors' escrow accounts 4,367 3,762

Income taxes payable 3,079 169

Accrued expenses and other liabilities 7,655 7,613

Total liabilities 814,151 753,565

Commitments and contingencies

Stockholders equity:

Preferred stock, $0.01 par value; 5,000,000 shares authorized,

none issued - . - .

Common stock, $0.01 par value; 45,000,000 shares authorized,

29,688,927 shares and 29,641,500 shares issued, respectively 297 296

Additional paid-in capital 141,021 140,327

Retained earnings, partially restricted 177,167 165,210

Accumulated other comprehensive income 6,720 6,244Treasury stock, at cost - 2,921,378 shares

and 2,185,928 shares, respectively (33,813) (22,987)

Unearned compensation - recognition and retention plan (903) (1,070)

Unallocated common stock held by ESOP - 422,992 shares

and 455,771 shares, respectively (5,044) (5,435)

Total stockholders equity 285,445 282,585

Total liabilities and stockholders equity $ 1,099,596 $ 1,036,150

See accompanying notes to the consolidated financial statements.


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C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E

(In thousands, except share data)


Interest income:

Loans, excluding money market loan participations $ 61,681 $ 55,802 $ 48,595

Money market loan participations 1,017 2,054 1,539

Debt securities 10,189 11,081 12,795

Marketable equity securities 667 903 877

Restricted equity securities 470 485 369

Short-term investments 1,936 1,235 634

Total interest income 75,960 71,560 64,809

Interest expense:

Deposits 23,560 23,234 20,708

Borrowed funds 9,344 7,338 6,454

Total interest expense 32,904 30,572 27,162

Net interest income 43,056 40,988 37,647

Provision for loan losses 974 427 450Net interest income after provision for loan losses 42,082 40,561 37,197

Non-interest income:

Fees and charges 1,876 1,009 868

Gains on sales of securities, net 3,540 8,253 7,437

Other real estate owned income, net - . 172 711

Gain from termination of pension plan 3,667 - . - .

Swap contract market valuation adjustment (241) - . - .

Other income 456 460 98

Total non-interest income 9,298 9,894 9,114

Non-interest expense:Compensation and employee benefits 8,801 7,631 6,153

Recognition and retention plan 167 1,246 3,593

Occupancy 1,177 972 707

Equipment and data processing 3,329 1,986 1,172

Advertising and marketing 1,175 2,388 504

Internet bank start-up - . 746 675

Restructuring charge 3,927 - . - .

Other 2,239 1,854 1,354

Total non-interest expense 20,815 16,823 14,158

Income before income taxes 30,565 33,632 32,153

Provision for income taxes 11,231 11,998 11,362

Net income $ 19,334 $ 21,634 $ 20,791

Earnings per common share:

Basic $ 0.72 $ 0.80 $ 0.74

Diluted $ 0.71 $ 0.80 $ 0.74

Weighted average common shares outstanding:

Basic 26,732,571 26,881,433 28,016,150

Diluted 27,053,570 26,924,871 28,016,150



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C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E

(In thousands)


Net income $ 19,334 $ 21,634 $ 20,791

Other comprehensive income, net of taxes:Unrealized holding gains (losses) 4,215 5,904 (3,533)

Income tax expense (benefit) 1,542 2,205 (1,422)

Net unrealized holding gains (losses) 2,673 3,699 (2,111)

Less reclassification adjustment for gains included in net income:

Realized gains 3,540 8,253 7,437

Income tax expense 1,343 3,039 2,891

Net reclassification adjustment 2,197 5,214 4,546

Total other comprehensive income (loss) 476 (1,515) (6,657)

Comprehensive income $ 19,810 $ 20,119 $ 14,134



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Unearned UnallocatedAccumulated Compensation- Common

Additional Other Recognition Stock TotalCommon Paid-In Retained Comprehensive Treasury and Retention Held By Stockholders

Stock Capital Earnings Income Stock Plan ESOP Equity

Balance at December 31, 1998 $ 291 $ 134,490 $ 135,282 $ 14,416 $ (1,316) $ - . $ (4,941) $ 278,222

Net income - . - . 20,791 - . - . - . - . 20,791

Unrealized loss on securities

available for sale, net of

reclassification adjustment - . - . - . (6,657) - . - . - . (6,657)

Common stock dividends

of $0.21 per share - . - . (5,975) - . - . - . - . (5,975)

Treasury stock purchases

(1,378,200 shares) - . - . - . - . (15,018) - . - . (15,018)

Common stock issued in

conjunction with the

recognition and retention

plan (546,500 shares) 5 5,904 - . - . - . (5,909) - . - .

Compensation under recognition

and retention plan - . - . - . - . - . 3,593 - . 3,593

Common stock acquired by ESOP(55,000 shares) - . - . - . - . - . - . (549) (549)

Common stock held by ESOP

committed to be released

(34,239 shares) - . (39) - . - . - . - . 432 393

Balance at December 31, 1999 296 140,355 150,098 7,759 (16,334) (2,316) (5,058) 274,800

Net income - . - . 21,634 - . - . - . - . 21,634

Unrealized loss on securities


reclassification adjustment - . - . - . (1,515) - . - . - . (1,515)


of $0.24 per share - . - . (6,522) - . - . - . - . (6,522)


(694,228 shares) - . - . - . - . (6,653) - . - . (6,653)


and retention plan - . - . - . - . - . 1,246 - . 1,246Common stock acquired by ESOP

(84,386 shares) - . - . - . - . - . - . (802) (802)



(35,833 shares) - . (28) - . - . - . - . 425 397

Balance at December 31, 2000 296 140,327 165,210 6,244 (22,987) (1,070) (5,435) 282,585

Net income - . - . 19,334 - . - . - . - . 19,334

Unrealized gain on securities


reclassification adjustment - . - . - . 476 - . - . - . 476


of $0.46 per share - . - . (7,377) - . - . - . - . (7,377)

Exercise of stock options

(55,495 shares) 1 611 - . - . - . - . - . 612


(735,450 shares) - . - . - . - . (10,826) - . - . (10,826)


and retention plan - . - . - . - . - . 167 - . 167



(32,779 shares) - . 83. - . - . - . - . 391 474

Balance at December 31, 2001 $ 297 $ 141,021 $ 177,167 $ 6,720 $ (33,813) $ (903) $ (5,044) $ 285,445



C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S T O C K H O L D E R S E Q U I T Y

Years Ended December 31, 2001, 2000 and 1999 (Dollars in thousands)


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C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S

(In

brookline bank

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